Electricity producer KenGen has sold a 5.33 per cent stake to South Africa’s pension fund, Public Investment Corporation (PIC), for Sh2.3 billion.

Proceeds of the sale are being used to plug a financing gap that was left after last year’s sale of shares in a rights issue.

KenGen, which is listed at the Nairobi Securities Exchange, raised Sh26.4 billion in the rights issue, aiming to reduce its debt load and fund new power projects.

The 351.2 million shares – which have been offered at the rights issue price of Sh6.55 per share — has filled the funding gap that was left in the cash call after it failed to hit the Sh28.7 billion target. KenGen said it had entered into an agreement with the South African firm to sell the ordinary shares at the rights issue price.

“KenGen wishes to advise its shareholders and the public that it has, on February 22, 2017 entered into an agreement with the Public Investment Corporation … to allot ordinary shares in KenGen (equivalent to 5.33 per cent of the new issued share capital) at a price of KES 6.55 per share,” the company said in a statement.

The proposed transaction is subject to approvals from various regulators.

The company earlier said it was considering taking a loan to raise the Sh2.3 billion shortfall, which will now be provided by the South African fund in a deal that promises to dilute existing shareholders by a margin of 5.33 per cent.

It will, for instance, take the Treasury’s ownership from the current 73.92 per cent back to the previous 70 per cent.

The Treasury raised its stake in the firm after a section of shareholders declined to take up 351.2 million shares in the cash call, forcing the government to convert a Sh20.1 billion loan into shares.

The Treasury said it was committed to maintaining a 70 per cent interest in KenGen, which it sees as a strategic investment and needs support through arranging and guaranteeing cheap external loans. Conclusion of the sale will effectively see KenGen realise the entire Sh28.7 billion it was targeting in the cash call.

Announcement of the transaction has coincided with a short-term rally in the power producer’s stock, which has gained 32 per cent from lows of Sh4.95 on January 26 to Sh6.55 yesterday.

Completion of the share sale will raise the volume of KenGen’s outstanding shares from the current 6.5 billion units to 6.9 billion units.

The investment in KenGen underlines PIC’s strategy of diversifying outside South Africa where it is one of the biggest investors in publicly traded firms. It holds about 12.5 per cent of the Johannesburg Stock Exchange market capitalisation.

The fund is wholly owned by the South African government and manages pension money for various state entities, including the Government Employees Pension Fund, the Unemployment Insurance Fund and the Associated Institutions Pension Fund.

The fund is currently on course to invest five per cent of its capital in other African countries as a means of reducing its concentration in the domestic market, prompting the acquisition of the KenGen stake.

“Investments in emerging markets resident in Africa will aid in diversifying the funds. It will also create a footprint for future corporate investment throughout the African continent,” PIC said in a statement.

For KenGen, cash from the share sale will boost its financial position at a time when it has lined up more capital-intensive power projects.

The company last year saw its current ratio – a liquidity measure of a firm’s ability to pay short-term and long-term obligations — fall below the level set by the lenders. This amounted to a breach of the terms attached to Sh18.5 billion worth of long-term debt, raising the spectre of the loans being recalled within a year in the absence of the waivers it was seeking.

KenGen has focused on improving its ability to take on more debt to finance new power plants.

The projects will cost nearly $1 billion (Sh103 billion) in aggregate, with various funding options including debt and joint ventures being considered to raise the large sum.

The company’s net profit for the year ended June 2016 dropped 41 per cent to Sh6.7 billion on a Sh2.4 billion special tax triggered by the company’s payment of Sh5.7 billion in dividend arrears to the Treasury. Other shareholders were not paid a dividend for the review period, marking the first time the company had suspended pay-outs to non-government investors since listing in 2006.